Hedge funds are beginning to shift toward the bearish end of the spectrum when it comes to sentiment on emerging markets, according to a recent investor survey. But while the shift was meaningful, funds still remain on the bullish side even though they’re starting to like emerging markets less than they did.

Emerging market sentiment declines

Societe Generale analyst Benoit Anne said in a report last week that their survey indicated that while 60.7% of investors were bullish on emerging markets, it’s still a significant decline from February’s 74.4% of investors who were bullish on them. The survey covered two weeks in March and 89 investor accounts in the U.S., Europe and Asia, which included 44 hedge funds and 45 real-money investors.

In conducting the survey, they asked four questions, two of which focused on sentiment on emerging markets. The other two focused on positioning and “appetite” for four major asset classes.

Question #1: two-week emerging markets sentiment

The first question was, “From -5 (max bearish) to +5 (max bullish), what is your sentiment towards global emerging markets over the next two weeks?” Here’s what they found (All graphs in this article are courtesy Societe Generale):

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Once again, Societe Generale noted that the percentage of investors who were bullish on emerging markets for the following two weeks declined from 74.4% in the previous month. The firm also stated that the number of bearish investors increased slightly from 17.1% the previous month, while the percentage of neutral investors increased significantly from 8.5% in February.

Hedge funds in particularly were more likely to shift toward the bearish end of the spectrum, as 56.8% of them had an appetite for emerging markets risk in March. That’s compared to the previous month’s 75.6%.

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There was also a decline in appetite among real-money accounts, but it was less pronounced, falling from 73.2% in February to 64.4% in March.

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Question #2: three-month emerging markets sentiment

The second question was, “From -5 (max bearish) to +5 (max bullish), what is your sentiment towards global emerging markets over the next three months?” Societe Generale found only a marginal decline month over month in bullish bias overall, which fell from 54.9% in February. There was also a meaningful increase in bearishness, which increased from 34.1% the previous month.

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The story was similar regarding with hedge funds’ three-month sentiment toward global emerging markets shifting toward the bearish end of the spectrum. In fact, most hedge funds are now “predominantly bearish” for the three-month time frame, according to the firm.

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At the other extreme, however, real-money investors are mostly bullish.

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Question #3: positioning in emerging markets

The third question was, “From -5 (max underweight/short) to +5 (max overweight/long), how do you think you are positioned?”

Societe Generale found that of all the investors they surveyed, the percentage who were overweight on emerging markets fell from 64.6% in the previous month, while the percentage of underweight investors increased only slightly month over month.

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In terms of the “technical picture,” the firm found that changes in real-money investor behavior actually drove the change. The majority of real-money investors are under-invested rather than over-invested, and the firm states that the last time we saw this “phenomenon” was in October “when investors went into panic mode.

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Question #4: hard-currency debt favored

And finally, the fourth question was, “From -5 to +5 what is your appetite over the next three months for the four following asset classes: i) hard-currency debt; ii) EM FX; iii) Local-currency debt, and iv) EM equities?” Societe Generale found that all except emerging markets foreign exchange scored positive results overall. The firm also states that emerging market hard currency debt is the favored asset class.

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